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for Accounting Professionals IFRS 8 Operating segments 2011 1 http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng IFRS 8 Operating segments IFRS WORKBOOKS (1 million downloaded) Welcome to IFRS Workbooks! These are the latest versions of the legendary workbooks in Russian and English produced by 3 TACIS projects, sponsored by the European Union (2003-2009) and led by PricewaterhouseCoopers. They have also appeared on the website of the Ministry of Finance of the Russian Federation. The workbooks cover various concepts of IFRS based accounting. They are intended to be practical self-instruction aids that professional accountants can use to upgrade their knowledge, understanding and skills. Each workbook is a self-standing short course designed for approximately of three hours of study. Although the workbooks are part of a series, each one is independent of the others. Each workbook is a combination of Information, Examples, Self-Test Questions and Answers. A basic knowledge of accounting is assumed, but if any additional knowledge is required this is mentioned at the beginning of the section. Having written the first three editions, we want to update them and provide them to you to download. Please tell your friends and colleagues. Relating to the first three editions and updated texts, the copyright of the material contained in each workbook belongs to the European Union and according to its policy may be used free of charge for any non-commercial purpose. The copyright and responsibility of later books and the updates are ours. Our copyright policy is the same as that of the European Union. We wish to especially thank Elizabeth Appraxine (European Union) who administered these TACIS projects, Richard J. Gregson (Partner, PricewaterhouseCoopers) who led the projects and all friends at Bankir.Ru for hosting the books. TACIS project partners included Rosexpertiza (Russia), ACCA (UK), Agriconsulting (Italy), FBK (Russia), and European Savings Bank Group (Brussels). The help of Philip W. Smith (editor of the third edition) and Allan Gamborg, project managers and Ekaterina Nekrasova, Director of PricewaterhouseCoopers, who managed the production of the Russian version (2008-9) is gratefully acknowledged. Glyn R. Phillips, manager of the first two projects conceived the idea, designed the workbooks and edited the first two versions. We are proud to realise his vision. Robin Joyce Professor of the Chair of International Banking and Finance Financial University under the Government of the Russian Federation Visiting Professor of the Siberian Academy of Finance and Banking http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng Moscow, Russia 2011 Updated 2 Multiple choice questions CONTENTS 20 Answers to multiple choice questions ...................... 26 Background 3 Definitions 4 Background Main features of IFRS 8 5 IFRS 8 - Core principle 6 Standards of financial statements are published to specify disclosure and/or to move profit from one period to another. IFRS 8 is exclusively about disclosure. Scope 6 Operating segments 7 Reportable segments 8 Quantitative thresholds 9 As undertakings become larger, understanding how they operate: - in different markets, - with different products and services and Disclosure - General information ............................... 13 - providing to a growing range of clients Disclosure - Specific information............................... 13 becomes more difficult, unless additional detail is provided. Disclosure - Information about profit or loss, assets and liabilities ............... 14 Measurement 16 Reconciliations 17 Information about products and services – total undertaking ................. 18 Information about geographical areas – total undertaking ................. 19 Information about major clients areas – total undertaking ................. 19 3 http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng Information about components of an undertaking, the products and services that it offers, its foreign operations, and its major clients is useful for understanding and making decisions about the undertaking as a whole. Users observe that the evaluation of the prospects for future cash flows is the central element of investment and lending decisions. The evaluation of prospects requires assessment of the uncertainty that surrounds both the timing and the amount of the expected cash flows to the undertaking, which in turn affect potential cash flows to the investor or creditor. Users also observe that uncertainty results in part from factors related to the products and services an undertaking offers and the geographic areas in which it operates. IFRS 8 Operating Segments Different segments will generate dissimilar streams of cash flows, to which are attached disparate risks and which bring about unique values. Thus, without disaggregation, there is no sensible way to predict the overall amounts, timing, or risks of a complete undertaking’s future cash flows. EXAMPLE – risk assessment Your group has invested in a country that has become politically unstable. Segment reporting explains how much (or little) performance depends on that country, and helps measure the risk that any loss of business could have on the group. The additional detail should: (1) increase the number of reported segments and provide more information; Segments based on the structure of an undertaking’s internal organisation have at least three other significant advantages: 1. An ability to see an undertaking “through the eyes of management” enhances a user’s ability to predict actions or reactions of management that can significantly affect the undertaking’s prospects for future cash flows. 2. As information about those segments is generated for management’s use, the incremental cost of providing information for external reporting should be relatively low. 3. Practice has demonstrated that the term ‘industry’ is subjective. Segments based on an existing internal structure should be less subjective. (2) enable users to see an undertaking through the eyes of management; IFRS 8 arises from the IASB’s consideration of (US) FASB Statement No.131 Disclosures about Segments of an Undertaking and Related Information (SFAS 131), compared with (the nowsuperseded) IAS 14 Segment Reporting. (3) enable an undertaking to provide timely segment information for external interim reporting with relatively low incremental cost; IFRS 8 achieves convergence with the requirements of SFAS 131, except for minor differences. (4) enhance consistency with the management discussion and analysis or other annual report disclosures; and Definitions An operating segment is a component of an undertaking: (5) provide various measures of segment performance. Knowledge of the structure of an undertaking’s internal organisation is valuable in itself because it highlights the risks and opportunities that management believes are important. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng (1) that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same undertaking), 4 IFRS 8 Operating Segments (2) whose operating results are regularly reviewed by the undertaking’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and Operating segments are components of an undertaking about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. (3) for which discrete financial information is available. The term ‘chief operating decision maker’ identifies a function, not necessarily a manager with a specific title. That function is to allocate resources to and assess the performance of the operating segments of an undertaking. Often the chief operating decision maker of an undertaking is its chief executive officer or chief operating officer but, for example, it may be a group of executive directors or others. IFRS 8 Operating Segments sets out requirements for disclosure of information about an undertaking’s operating segments and also about the undertaking’s products and services, the geographical areas in which it operates, and its major clients. Main features of IFRS 8 IFRS 8 specifies how an undertaking should report information about its operating segments in annual financial statements and in interim financial reports. It also sets out requirements for related disclosures about products and services, geographical areas and major clients. IFRS 8 requires an undertaking to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng Generally, financial information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments. IFRS 8 requires an undertaking to report a measure of operating segment profit or loss and of segment assets. It also requires an undertaking to report a measure of segment liabilities and particular income and expense items if such measures are regularly provided to the chief operating decision maker. It requires reconciliations of total reportable segment revenues, total profit or loss, total assets, liabilities and other amounts disclosed for reportable segments to corresponding amounts in the undertaking’s financial statements. IFRS 8 requires an undertaking to report information about the revenues derived from its products or services (or groups of similar products and services), about the countries in which it earns revenues and holds assets, and about major clients, regardless of whether that information is used by management in making operating decisions. However, IFRS 8 does not require an undertaking to report information that is not prepared for internal use if the necessary information is not available and the cost to develop it would be excessive. 5 IFRS 8 Operating Segments IFRS 8 also requires an undertaking to give descriptive information about the way the operating segments were determined, the products and services provided by the segments, differences between the measurements used in reporting segment information and those used in the undertaking’s financial statements, and changes in the measurement of segment amounts from period to period. IFRS 8 - Core principle An undertaking shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates. IAS 34 Interim Financial Reporting, requires an undertaking to report selected information about its operating segments in interim financial reports. Scope (2) the consolidated financial statements of a group with a parent: (i) whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange, or an over-the-counter market, including local and regional markets), or (ii) that files, or is in the process of filing, the consolidated financial statements with a securities commission, or other regulatory organisation for the purpose of issuing any class of instruments in a public market. If an undertaking that is not required to apply IFRS 8 chooses to disclose information about segments that does not comply with IFRS 8, it shall not describe the information as segment information. If a financial report contains both the consolidated financial statements of a parent that is within the scope of IFRS 8 as well as the parent’s separate financial statements, segment information is required only in the consolidated financial statements. IFRS 8 shall apply to: (1) the separate or individual financial statements of an undertaking: (i) whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange, or an over-the-counter market, including local and regional markets), or EXAMPLES-group accounts 1. You produce consolidated accounts for your listed group. You include the parent company’s full financial statements, and those of the subsidiaries located in your country. (ii) that files, or is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and Only the consolidated accounts need provide segment information. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 6 IFRS 8 Operating Segments 2. You produce consolidated accounts for the group. The parent company is a privately-owned company, that is not listed on any stock exchange. The shares of your largest subsidiary is traded on your national stock exchange. Only the largest subsidiary’s accounts need provide segment information. EXAMPLE-associates 1. You produce consolidated accounts for your listed group. You include the associate company accounts. The associate is a listed company. You need provide segment information for group companies, other than the listed associate. The associate will produce segment information in its own accounts. EXAMPLE - listed securities Does segment reporting apply when an unlisted company has a subsidiary with listed securities? E plc is a large unlisted company that is required to prepare consolidated accounts. E plc has a subsidiary, F plc,that has debt listed on the London Stock Exchange. Do the accounts of E plc fall within the scope of IFRS 8? the E plc group has listed debt in issue. The question is, then, whether the definition of the entity in the context of consolidated financial statements is the parent company or the consolidated group. IFRS 10 defines consolidated financial statements as the financial statements of a group presented as those of a single economic entity. Applying this definition leads us to conclude that the entity for IFRS 8 purposes is the consolidated group and not the solus parent entity. Thus, the entity (the E plc group) does have listed securities and should make the disclosures required by IFRS 8. In addition, the financial statements of F plc fall within the scope of IFRS 8 and disclosures are also required in that company’s separate financial statements. Operating segments An operating segment may engage in business activities for which it has yet to earn revenues, for example, start-up operations may be operating segments before earning revenues. IFRS 8 applies to entities whose equity or debt securities are publicly traded (and by entities that are in the process of issuing equity or debt securities in public securities markets). Not every part of an undertaking is necessarily an operating segment or part of an operating segment. For example, a corporate headquarters or some functional departments may not earn revenues or may earn revenues that are only incidental to the activities of the undertaking and would not be operating segments. Although E plc (entity) does not have any publicly-traded securities, An undertaking’s pension plans are not operating segments. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 7 IFRS 8 Operating Segments An undertaking may produce reports in which its business activities are presented in a variety of ways. If the chief operating decision maker uses more than one set of segment information, other factors may identify a single set of components as constituting an undertaking’s operating segments, including the nature of the business activities of each component, the existence of managers responsible for them, and information presented to the board of directors. EXAMPLE- next lower level of internal segmentation Your management wants to use segment reporting, but only receives one set of figures for the group as a whole, with no further analysis. You will need to look at how the figures are assembled to identify the next lower level of internal segmentation. It may be found in the reports to divisional managers. The characteristics may apply to two or more overlapping sets of components for which managers are held responsible. That structure is sometimes referred to as a matrix form of organisation. In that situation, the undertaking shall determine which set of components constitutes the operating segments by reference to the core principle. EXAMPLE-matrix form of organisation In some undertakings, some managers are responsible for different product and service lines worldwide, whereas other managers are responsible for specific geographical areas. The chief operating decision maker regularly reviews the operating results of both sets of components, and financial information is available for both. Reportable segments Generally, an operating segment has a segment manager who is directly accountable to and maintains regular contact with the chief operating decision maker to discuss operating activities, financial results, forecasts, or plans for the segment. An undertaking shall report separately information about each operating segment that: (1) has been identified, or results from aggregating two or more of those segments, and The term ‘segment manager’ identifies a function, not necessarily a manager with a specific title. The chief operating decision maker also may be the segment manager for some operating segments. A single manager may be the segment manager for more than one operating segment. If the characteristics apply to more than one set of components of an organisation but there is only one set for which segment managers are held responsible, that set of components constitutes the operating segments. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng (2) exceeds the quantitative thresholds (see below). Aggregation criteria Operating segments often exhibit similar long-term financial performance if they have similar economic characteristics. For example, similar long-term average gross margins for two operating segments would be expected if their economic characteristics were similar. 8 IFRS 8 Operating Segments Two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with the core principle of IFRS 8, the segments have similar economic characteristics, and the segments are similar in each of the following respects: Your production facilities are all in the southern hemisphere. Your clients are all in the northern hemisphere. Your segments can either be based on your production facilities, or the locations of your clients. Your group’s reporting structure will indicate which choice to take. (1) the nature of the products and services; (4) the methods used to distribute their products or provide their services; and EXAMPLE-dissimilar services Your group includes cobblers’ shops and banks. These would not be included in the same segment. (2) the nature of the production processes; EXAMPLE-vertical integration-oil companies Many international oil companies report their upstream activities (exploration and production) and their downstream activities (refining and marketing) as separate business segments, even if most of the upstream product (crude petroleum) is transferred internally to the undertaking’s refining operation. (3) the type or class of client for their products and services; EXAMPLE-dissimilar locations Your group provides pharmaceuticals to all areas of the world. Countries where tropical diseases will have different characteristics from those where colds and influenza dominate. The two groups would not be included in the same segment. EXAMPLE-dissimilar distribution You have a food business. Part of the business is wholesale: low profit margins, and high volume. The other part is restaurants: higher margins, but lower volumes. Both should be separate segments. (5) if applicable, the nature of the regulatory environment, for example, banking, insurance or public utilities. EXAMPLES-regulatory environment Among your major investments are a bank and a company that provides electricity to domestic users. Both have to report to different state bodies, who can control their profitability. Both should be separate segments. Quantitative thresholds An undertaking shall report separately information about an operating segment that meets any of the following quantitative thresholds: EXAMPLE-geographical segments http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 9 IFRS 8 Operating Segments (1) Its reported revenue, including both sales to external clients and intersegment sales or transfers, is 10 per cent or more of the combined revenue, internal and external, of all operating segments. (2) The absolute amount of its reported profit or loss is 10 per cent or more of the greater, in absolute amount, of (i) the combined reported profit of all operating segments that did not report a loss and cent of the undertaking’s revenue is included in reportable segments. Information about other business activities and operating segments that are not reportable shall be combined and disclosed in an ‘all other segments’ category separately from other reconciling items in the reconciliations (see below). The sources of the revenue included in the ‘all other segments’ category shall be described. EXAMPLE - Voluntary disclosure of additional segment (ii) the combined reported loss of all operating segments that reported a loss. (3) Its assets are 10 per cent or more of the combined assets of all operating segments. Operating segments that do not meet any of the quantitative thresholds may be considered reportable, and separately disclosed, if management believes that information about the segment would be useful to users. An undertaking may combine information about operating segments that do not meet the quantitative thresholds with information about other operating segments that do not meet the quantitative thresholds to produce a reportable segment only if the operating segments have similar economic characteristics and share a majority of the aggregation criteria. If the total external revenue reported by operating segments constitutes less than 75 per cent of the undertaking’s revenue, additional operating segments shall be identified as reportable segments (even if they do not meet the criteria) until at least 75 per Entity B currently prepares segment disclosures in accordance with IFRS 8 The segment information includes three business segments and the results of unallocated parts of the business that do not meet the 10% thresholds for assets, segment result or revenue. B’s management is considering presenting a fourth segment to reflect a component of the business that is currently included within the unallocated results. This fourth component, which generates all of its revenues from third parties, falls below the 10% thresholds for mandatory reporting; however, it is a part of the business that is growing rapidly and is expected to reach the 10% thresholds in the next few years. Management therefore believes it would be helpful for readers of the financial statements if the results were presented as a separate segment. Can B’s management present a fourth segment under IFRS 8? http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 10 IFRS 8 Operating Segments Yes. B’s management may present a fourth segment if it believes that this information will be useful to the users of the financial statements. This is permitted by IFRS 8. If the fourth segment is presented, then the comparatives should be restated to provide the same presentation. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 11 IFRS 8 Operating Segments Diagram for identifying reportable segments Identify operating segments based on management reporting system. YES Aggregate segments if desired Do some operating segments meet all aggregation criteria? NO Do some operating segments meet the quantitative thresholds? YES NO YES Do some of the remaining operating segments meet a majority of the aggregation criteria? Aggregate segments if desired NO Do identified reportable segments account for 75% of the total revenue? YES NO Report additional segment if external revenue of all segments is less than 75% of total revenue, These are Aggregate remaining segments reportable into 'all other segments' segments. category. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 12 If management judges that an operating segment identified as a reportable segment in the immediately preceding period is of continuing significance, information about that segment shall continue to be reported separately in the current period even if it no longer meets the criteria. Yes. The foreign exchange gains and losses arise directly from the revaluation of the foreign currency receivables from each segment and should be included in segment result which is the difference between segment revenue and expense. If an operating segment is identified as a reportable segment in the current period, segment data for a prior period presented for comparative purposes shall be restated to reflect the newly reportable segment as a separate segment, even if that segment did not satisfy the criteria for reportability in the prior period, unless the necessary information is not available and the cost to develop it would be excessive. Segment expense is the directly attributable costs of each segment. The foreign exchange gains and losses are directly attributable to the segments from which they arise. There may be a practical limit to the number of reportable segments that an undertaking separately discloses beyond which segment information may become too detailed. Although no precise limit has been determined, if the number of segments that are reportable in increases above ten, the undertaking should consider whether a practical limit has been reached. (1) factors used to identify the undertaking’s reportable segments, including the basis of organisation (for example, whether management has chosen to organise the undertaking around differences in products and services, geographical areas, regulatory environments, or a combination of factors and whether operating segments have been aggregated), and EXAMPLE - Exchange gains and losses segments (2) types of products and services from which each reportable segment derives its revenues. Entity D has operations in four business segments. The foreign exchange gains and losses arising from the revaluation of foreign currency receivable balances are recorded within administrative expenses and therefore within operating profit. D presents segment information in accordance with IFRS 8, including segment result. Should segment result include the foreign exchange gains and losses arising from the revaluation of foreign currency receivables from that segment? 13 http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng Disclosure - General information An undertaking shall disclose the following general information: Disclosure - Specific information An undertaking shall disclose information to enable users to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates. An undertaking shall disclose the following for each period for which an income statement is presented: IFRS 8 Operating Segments (1) general information as described above; - the basis of measurement,; and (2) information about reported segment profit or loss, including: (3) reconciliations of the totals: - specified revenues and expenses included in reported segment profit or loss, - of segment revenues, - reported segment profit or loss, EXAMPLE-intersegment pricing Your policy is that sales between segments should be at list price minus 15%. This should be stated as a segment accounting policy. - segment assets, EXAMPLE-doubtful debt provision Your accounts receivable are collected centrally. Your segment assets will include its share of accounts receivable, and also the portion of doubtful debt provision relating to those receivables. - segment assets, - segment liabilities and - other material segment items to total undertaking amounts. Reconciliations of statement of financial position (balance sheet) amounts for reportable segments to the undertaking’s balance sheet amounts are required for each date at which a balance sheet is presented. Information for prior periods shall be restated. - segment liabilities and EXAMPLE-interest-bearing liabilities You show your segment result after accounting for interest expense. The segment liabilities should show the liabilities (loans) that have incurred the interest expense. EXAMPLE- product warranty provisions Your segment provides televisions and video equipment. The group makes a central warranty provision to cover after-sale repairs. Your segment liabilities should include your share of this product warranty provision. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng Disclosure - Information about profit or loss, assets and liabilities An undertaking shall report a measure of profit or loss and total assets for each reportable segment. An undertaking shall report a measure of liabilities for each reportable segment if such an amount is regularly provided to the chief operating decision maker. An undertaking shall also disclose the following about each reportable segment if the specified amounts are included in the 14 IFRS 8 Operating Segments measure of segment profit or loss reviewed by the chief operating decision maker, or are otherwise regularly provided to the chief operating decision maker, even if not included in that measure of segment profit or loss: (1) revenues from external clients; (2) revenues from transactions with other operating segments of the same undertaking; EXAMPLE-internal sales and balances In preparing your segment reports, you eliminate transactions within the segment, such as sales from one unit to another within the segment, and also the balances between one unit and another within the segment. Transactions with other units of the group, that are outside the segment, and balances with those units, should not be eliminated for segment reporting. They will be eliminated in the consolidated financial statements. These differences will be reconciled within the segment reporting. (3) interest revenue; (4) interest expense; (5) depreciation and amortisation; (9) material non-cash items other than depreciation and amortisation. An undertaking shall report interest revenue separately from interest expense for each reportable segment, unless a majority of the segment’s revenues are from interest and the chief operating decision maker relies primarily on net interest revenue to assess the performance of the segment and make decisions about resources to be allocated to the segment. In that situation, an undertaking may report that segment’s interest revenue net of its interest expense and disclose that it has done so. An undertaking shall disclose the following about each reportable segment if the specified amounts are included in the measure of segment assets reviewed by the chief operating decision maker or are otherwise regularly provided to the chief operating decision maker, even if not included in the measure of segment assets: (1) the amount of investment in associates and joint ventures accounted for by the equity method, and EXAMPLE-associated company Your segment assets include your share of profit from an associate, which acts as a sales agent. You should include the investment in the associate with in the segment assets. (6) material items of income and expense (see IAS 1); (7) the undertaking’s interest in the profit or loss of associates and joint ventures accounted for by the equity method; (8) income tax expense or income; and http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng (2) the amounts of additions to non-current assets (assets that include amounts expected to be recovered more than twelve months after the balance sheet date) other than financial instruments, deferred tax assets, pension assets and rights arising under insurance contracts. 15 IFRS 8 Operating Segments recognised? EXAMPLE-goodwill Your segment has benefited from an acquisition of another company. The segment has been allocated 60% of the goodwill, related to that acquisition. Later, the goodwill is tested for impairment, and your segment finds that its share of goodwill is impaired. Your segment expenses its impairment charge. EXAMPLE - IFRS 8 and goodwill impairment C plc is applying IFRS 8 for the first time in its consolidated financial statements. C plc has goodwill acquired in business combinations that has been allocated to each of its cash generating units (CGUs) for the purposes of impairment testing under IAS 36, Impairment of Assets. The identification of operating segments in accordance with IFRS 8 has resulted in a change from the segments that were historically reported under IAS 14. In accordance with IAS 36, the CGU to which the goodwill is allocated for the purpose of impairment testing should not be larger than an operating segment determined in accordance with IFRS 8. As a result of the limit imposed by IAS 36 on the size of the CGUs to which goodwill is allocated for the purposes of impairment testing, C plc has had to reallocate goodwill between CGUs on the adoption of IFRS 8. C plc has identified that an impairment charge will arise solely as a result of this reallocation. How should this impairment be http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng The requirement for C plc to look at operating rather than reporting segments was a consequential amendment to IAS 36 when IFRS 8 was issued. So, in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, the first-time adoption of IFRS 8 should be accounted for retrospectively. Hence, any goodwill impairment arising on the reallocation of goodwill between CGUs should also be treated retrospectively. Measurement The amount of each segment item reported shall be the measure reported to the chief operating decision maker for the purposes of making decisions about allocating resources to the segment and assessing its performance. Adjustments and eliminations shall be included in segment profit or loss only if they are included in the segment’s profit or loss that is used by the chief operating decision maker. Similarly, only those assets and liabilities that are included in the segment’s assets and segment’s liabilities that are used by the chief operating decision maker shall be reported for that segment. If amounts are allocated to reported segment profit or loss, assets or liabilities, those amounts shall be allocated on a reasonable basis. EXAMPLE-pension allocation Group pension calculations may be allocated to segments based on salary, and demographic, data for the segments. 16 IFRS 8 Operating Segments If the chief operating decision maker uses more than one measure of an operating segment’s profit or loss, the segment’s assets or the segment’s liabilities, the reported measures shall be those that management believes are most consistent with those used in the financial statements. An undertaking shall provide an explanation of the measurements of segment profit or loss, segment assets and segment liabilities for each reportable segment. At a minimum, an undertaking shall disclose the following: (1) the basis of accounting for any transactions between reportable segments. (2) the nature of any differences between: -the measurements of the reportable segments’ profits or losses, assets and liabilities and -the undertaking’s profit or loss before income tax expense or income and discontinued operations, assets and liabilities (if not apparent from the reconciliations). usage of central facilities, such as central research. These allocations should be included in segment expense. (3) the nature of any changes from prior periods in the measurement methods used to determine reported segment profit or loss and the impact, if any, of those changes on the measure of segment profit or loss. (4) the nature and effect of any asymmetrical allocations to reportable segments. For example, an undertaking might allocate depreciation expense to a segment without allocating the related assets to that segment. EXAMPLE-shared assets Your segment uses another’s machine, for which you are charged 40% of the depreciation charge. Either your segment assets should include 40% of the value of asset, and 40% of its accumulated depreciation to match the charge, or an explanation will be needed as a “nature and effect of a asymmetrical allocation”. Reconciliations Such differences could include accounting policies and policies for allocation of centrally incurred costs and jointly-used assets and liabilities that are necessary for an understanding of the reported segment information. An undertaking shall provide reconciliations of all of the following: EXAMPLE-head office expenses (2) the total of the reportable segments’ measures of profit or loss to the undertaking’s profit or loss before tax expense (tax income) and discontinued operations. You allocate a portion of head office expenses to your operating divisions (which comprise your segments). All allocations reflect http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng (1) the total of the reportable segments’ revenues to the undertaking’s revenue. 17 IFRS 8 Operating Segments However, if an undertaking allocates to reportable segments items such as tax expense (tax income), the undertaking may reconcile the total of the segments’ measures of profit or loss to the undertaking’s profit or loss after those items. (3) the total of the reportable segments’ assets to the undertaking’s assets. periods, shall be restated unless the information is not available and the cost to develop it would be excessive. EXAMPLES- changes in policies relate specifically to segment reporting (4) the total of the reportable segments’ liabilities to the undertaking’s liabilities if segment liabilities are reported. Changes in identification of segments, and changes in the basis for allocating revenues, and expenses, to segments. Such changes will not change aggregate financial information reported for the undertaking. (5) the total of the reportable segments’ amounts for all other material items disclosed to the corresponding amount for the undertaking. The determination of whether the information is not available and the cost to develop it would be excessive shall be made for each individual item of disclosure. EXAMPLES-other material items Write-downs of inventories and property, plant, and equipment, provisions for restructurings, disposals of property, plant, and equipment and long-term investments, discontinued operations, litigation settlements, and reversals of provisions. Following a change in its reportable segments, an undertaking shall disclose whether it has restated the corresponding items of segment information for earlier periods. All material reconciling items shall be separately identified and described. EXAMPLE-material reconciling item For example, the amount of each material adjustment needed to reconcile reportable segment profit or loss to the undertaking’s profit or loss arising from different accounting policies shall be separately identified and described. Restatement of previously reported information If an undertaking changes its reportable segments, the corresponding information for earlier periods, including interim http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng If an undertaking has changed its reportable segments and if segment information for earlier periods, including interim periods, is not restated, in the year of the change the undertaking shall disclose segment information for the current period on both the old basis and the new basis of segmentation, unless the necessary information is not available and the cost to develop it would be excessive. Information about products and services – total undertaking An undertaking shall report the revenues from external clients for each product and service, or each group of similar products and services, unless the necessary information is not available and the 18 IFRS 8 Operating Segments cost to develop it would be excessive, in which case that fact shall be disclosed. If assets in an individual foreign country are material, those assets shall be disclosed separately. The amounts of revenues reported shall be based on the financial information used to produce the undertaking’s financial statements. The amounts reported shall be based on the financial statements. If the necessary information is not available and the cost to develop it would be excessive, that fact shall be disclosed. An undertaking may provide, in addition to the information required by this paragraph, subtotals of geographical information about groups of countries. Information about geographical areas – total undertaking An undertaking shall report the following geographical information, unless the necessary information is not available and the cost to develop it would be excessive: (1) revenues from external clients (i) attributed to the undertaking’s country of domicile and (ii) attributed to all foreign countries in total from which the undertaking derives revenues. If revenues from external clients attributed to an individual foreign country are material, those revenues shall be disclosed separately. An undertaking shall disclose the basis for attributing revenues from external clients to individual countries. (2) non-current assets other than financial instruments, deferred tax assets, post-employment benefit assets, and rights arising under insurance contracts (i) located in the undertaking’s country of domicile and (ii) located in all foreign countries in total in which the undertaking holds assets. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng Information about major clients areas – total undertaking An undertaking shall provide information about the extent of its reliance on its major clients. If revenues from a single external client amount to 10 per cent or more of an undertaking’s revenues, the undertaking shall disclose that fact, the total amount of revenues from each such client, and the segment or segments reporting the revenues. EXAMPLE - information about major clients Revenues from one client of Big Company’s software and electronics segments represent approximately $150 million of the Company’s total revenues. The undertaking need not disclose the identity of a major client or the amount of revenues that each segment reports from that client. A group of undertakings under common control shall be considered a single client . 19 IFRS 8 Operating Segments However, judgement is required to assess whether a government and undertakings under the control of that government are considered a single customer. In assessing this, the reporting entity shall consider the extent of economic integration between those entities. those described in the summary of significant accounting policies, except that pension expense for each operating segment is recorded and measured on the basis of cash payments to the pension plan. Big Company evaluates performance on the basis of profit or loss from operations before tax expense, not including nonrecurring gains and losses and foreign exchange gains and losses. Segment information for prior years that is reported as comparative information for the initial year of application shall be restated to conform to the requirements of IFRS 8, unless the necessary information is not available and the cost to develop it would be excessive. Big Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties, ie at current market prices. EXAMPLE - description of the types of products and services from which each reportable segment derives its revenues EXAMPLE - factors that management used to identify the undertaking’s reportable segments Big Company has five reportable segments: car parts, motor vessels, software, electronics and finance. --The car parts segment produces replacement parts for sale to car parts retailers. -The motor vessels segment produces small motor vessels to serve the offshore oil industry and similar businesses. -The software segment produces application software for sale to computer manufacturers and retailers. --The electronics segment produces integrated circuits and related products for sale to computer manufacturers. -The finance segment is responsible for portions of the company’s financial operations including financing client purchases of products from other segments and property lending operations. Big Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Most of the businesses were acquired as individual units, and the management at the time of the acquisition was retained. Multiple choice questions EXAMPLE -measurement of operating segment profit or loss, assets and liabilities 1. Operating segment information should: The accounting policies of the operating segments are the same as http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 20 IFRS 8 Operating Segments (i) increase the number of reported segments and provide more information; (ii) enable users to see an undertaking through the eyes of management; (iii) enable an undertaking to provide timely segment information for external interim reporting with relatively low incremental cost; (iv) enhance consistency with the management discussion and analysis or other annual report disclosures; (iii) Practice has demonstrated that the term ‘industry’ is subjective. Segments based on an existing internal structure should be less subjective. (iv) Earnings per share calculations can be compared between segments. 1 (i)-(ii) 2. (i)-(iii) 3. (i)-(iv) (v) provide various measures of segment performance: (vi) reduce staff. 1. 2. 3. 4. 5. (i)-(ii) (i)-(iii) (i)-(iv) (i)-(v) (i)-(vi) 2. Segments based on the structure of an undertaking’s internal organisation have other significant advantages: (i) An ability to see an undertaking “through the eyes of management” enhances a user’s ability to predict actions or reactions of management that can significantly affect the undertaking’s prospects for future cash flows. (ii) As information about those segments is generated for management’s use, the incremental cost of providing information for external reporting should be relatively low. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 3. An operating segment is a component of an undertaking: (i) that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same undertaking), 21 IFRS 8 Operating Segments (iii) (ii) whose operating results are regularly reviewed by the undertaking’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, (iv) (v) differences between the measurements used in reporting segment information and those used in the undertaking’s financial statements, changes in the measurement of segment amounts from period to period, the impact of staff development policies on the segment. (iii) for which discrete financial information is available, (iv) which is taxed separately from other components. 1 (i)-(ii) 2. (i)-(iii) 3. (i)-(iv) 4. 1 (i)-(ii) 2. (i)-(iii) 3. (i)-(iv) 4. (i)-(v) 6. A component of an undertaking that sells primarily or exclusively to other operating segments of the undertaking: IFRS 8 requires an undertaking to report information about: (i) (ii) (iii) (iv) 1 2. 3. the revenues derived from its products or services (or groups of similar products and services), about the countries in which it earns revenues and holds assets, about major clients, about transactions with governments. (i)-(ii) (i)-(iii) (i)-(iv) 5. IFRS 8 requires an undertaking to give descriptive information about: (i) (ii) 1. Must be classed as an operating segment. 2. Must be excluded from being an operating segment. 3. Is included as an operating segment if the undertaking is managed that way. the way the operating segments were determined, the products and services provided by the segments, http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 7. IFRS 8 requires the following information: (i) factors used to identify the undertaking’s operating segments, including the basis of organisation (for example, whether management organises the undertaking around differences in 22 IFRS 8 Operating Segments products and services, geographical areas, regulatory environments, or a combination of factors and whether segments have been aggregated), (ii) types of products and services from which each reportable segment derives its revenues, (iii) the economic environment of each segment, (iv) the legal structure of each segment. 1 2. 3. (i)-(ii) (i)-(iii) (i)-(iv) 8. Interest: 1. Net interest revenue must be shown. 2. Neither interest revenue nor interest expense is required to be shown. 3. Both interest revenue and interest expense are required to be shown. 4. Both interest revenue and interest expense are required to be shown, unless a majority of the segment’s revenues are from interest and the chief operating decision maker relies primarily on net interest revenue to assess the performance of the segment. 9. IFRS 8 shall apply to: (i) listed companies, (ii) any company reporting under IFRS that wishes to provide the information, http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng (iii) all other companies reporting under IFRS. 1 2. (i)-(ii) (i)-(iii) 10. If information is not presented to the directors in sectors: 1. Look to the next lower level of internal segmentation that reports information along product and service lines or geographical lines. 2. Construct segments solely for external reporting purposes. 3. Segment information is not required for published financial statements. 11. If a financial report contains both the consolidated financial statements of a parent, as well as the parent’s separate financial statements, segment information is required: 1. only in the consolidated financial statements 2. only in the parent’s separate financial statements 3. both sets of financial statements 12. An operating segment may engage in business activities for which it has yet to earn revenues, for example, start-up operations: 1. will be operating segments before earning revenues. 2. may be operating segments before earning revenues. 3. will not be operating segments before earning revenues. 13. Head office expenses: 1. 2. 3. Can be allocated to segments on a reasonable basis. Must not be allocated to segments. Must be allocated to segments based on their turnover. 23 IFRS 8 Operating Segments 14. An undertaking’s pension plans : 1. will be operating segments. 2. may be operating segments. 3. will not be operating segments. 15. Two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with the core principle of IFRS 8, the segments have similar economic characteristics, and the segments are similar in each of the following respects: (i) the nature of the products and services; (ii) the nature of the production processes (iii) the type or class of client for their products and services; (iv) the methods used to distribute their products or provide their services; (v) if applicable, the nature of the regulatory environment, for example, banking, insurance or public utilities; 16. As a percentage of sales, profits or assets, a segment should be at least: 1. 5% 2. 7,5% 3. 10% 4. 15% 5. 20% 17. The total amount of revenue that should be covered by reportable segments is, at least: 1. 50% 2. 60% 3. 70% 4. 75% 5. 80% 6. 100% 18. Operating segments that do not meet any of the quantitative thresholds: 1. may be considered reportable, and separately disclosed. 2. must be combined and disclosed in an ‘all other segments’. 3. must be ignored. (vi) staff numbers. 1 2. 3. 4. 5. (i)-(ii) (i)-(iii) (i)-(iv) (i)-(v) (i)-(vi) 19. If an operating segment is identified as a reportable segment in the current period, segment data for a prior period: 1. is not required. 2. is optional. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 24 IFRS 8 Operating Segments 3. is required unless the necessary information is not available and the cost to develop it would be excessive. 20. IFRS 8 requires reconciliations of segement totals to total undertaking amounts: (ii) revenues from transactions with other operating segments of the same undertaking; (iii) interest revenue; (iv) interest expense; (i) of segment revenues, (v) depreciation and amortisation; (ii) reported segment profit or loss, (vi) material items of income and expense; (iii) segment assets, (iv) segment liabilities (vii) the undertaking’s interest in the profit or loss of associates and joint ventures accounted for by the equity method; (v) other material segment items (viii) income tax expense or income; and (vi) staff numbers. (ix) material non-cash items other than depreciation and amortisation. 1 2. 3. 4. 5. (i)-(ii) (i)-(iii) (i)-(iv) (i)-(v) (i)-(vi) 1 2. 3. 4. 5. 6. 7. 8. (i)-(ii) (i)-(iii) (i)-(iv) (i)-(v) (i)-(vi) (i)-(vii) (i)-(viii) (i)-(ix) 21. Information about the segments should include: (i) revenues from external clients; http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 22. An undertaking shall report the following geographical information: 25 IFRS 8 Operating Segments (i) revenues from external clients attributed to the undertaking’s country of domicile and attributed to all foreign countries in total from which the undertaking derives revenues. (ii) non-current assets other than financial instruments, deferred tax assets, post-employment benefit assets, and rights arising under insurance contracts located in the undertaking’s country of domicile and located in all foreign countries in total in which the undertaking holds assets. (iii) non-current liabilities other than financial instruments, deferred tax liabilities, post-employment benefit liabilities, and rights arising under insurance contracts located in the undertaking’s country of domicile and located in all foreign countries in total in which the undertaking has liabilities. 1 2. (i)-(ii) (i)-(iii) Question 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. Answer 4 2 2 2 3 3 1 4 1 1 1 2 1 3 4 3 4 1 3 4 8 1 Note: Material from the following PricewaterhouseCoopers publications has been used in this workbook: -Applying IFRS -IFRS News -Accounting Solutions Answers to multiple choice questions http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 26